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Keywords: earned value, managing projects, progress, cost, cash flow management.
1. INTRODUCTION
‘‘If you can’t measure it, you can’t manage it’’. Whether one trusts the validity of
this common phrase most of the time or all of the time, measuring the true progress of a
project presents a formidable task. Given a baseline plan, projects typically report a
measure of the completed work and compare it to that scheduled. Similarly, most projects
can and do measure the current cost and compare it to the planned spending. But for a
more comprehensive view, how does one measure the progress of a project against the
triple constraint of cost, schedule, and scope? The two simple measures above separate
schedule and cost and include scope only indirectly, as a function of schedule.
In this framework, the mere contemplation of the budgeted cost of work performed
cries out for an immediate comparison to the actual cost. Earned value analysis next brings
the schedule into this common comparison basis by asking how much spending should
have occurred, i.e., according to a project’s schedule, at the specific time of any
comparison.
∗
This work was supported by CNCSIS –UEFISCSU, project number PNII – IDEI code 378/2008
2. OBJECTIVES
The aim is to demonstrate that Earned Value Management (EVM) is a program
management technique that integrates technical performance requirements, resource
planning, with schedules, while taking risk into consideration (Fig. 1). The major
objectives of applying earned value to a contract are to encourage contractors to use
effective internal technical, cost and schedule management control systems, and to permit
the customer to rely on timely data produced by those systems for better management
insight [1]. This data is in turn used for determining product-oriented contract status, and
projecting future performance based on trends to date. In addition, EVM allows better and
more effective management decision making to minimize adverse impacts to the project.
Technical
Schedule
Perform ance
Tim e
Risk
Cost
Resources
3. METHODOLOGY
Earned value provides an objective measurement of how much work has been
accomplished on a project. Using the earned value process, the management team can
readily compare how much work has actually been completed against the amount of work
planned to be accomplished. All work is planned, budgeted, and scheduled in time-phased
"planned value" increments constituting a Performance Measurement Baseline (PMB).
Here are other definitions for Earned value:
• Englert and Associates, Inc define it as, "A method for measuring project performance.
It compares the amount of work that was planned with what was actually accomplished
to determine if cost and schedule performance is as planned."
• Project Management Institute defines it as, "A methodology used to measure and
communicate the real physical progress of a project taking into account the work
complete, the time taken and the costs incurred to complete that work" [5].
• The user guide for Microsoft Project 2003 defines Earned Value as, "a method for
measuring project performance. It indicates how much of the budget should have been
spent, in view of the amount of work done so far and the baseline cost for the task,
assignment, or resources" [2].
• NASA defines it as, "An integrated management control system for assessing,
understanding and quantifying what a contractor or field activity is achieving with
program dollars. EVM provides project management with objective, accurate and
timely data for effective decision making" [6].
Earned Value differs from the usual budget verses actual costs incurred model, in
that it requires the cost of work in progress to be quantified. This allows the project
manager to compare how much work has been completed against how much he expected
to be completed at a given point.
Earned Value is also known as Performance Measurement, Management by
Objectives, Budgeted Cost of Work Performed and Cost Schedule Control Systems.
Earned value (EV) is one of the most sophisticated and accurate methods for
measuring and controlling project schedules and budgets. Earned value has been used
extensively in large projects, especially in government projects. Project Management
Institute is a strong supporter of the earned value approach because of its ability to
accurately monitor the schedule and cost variances for complex projects [5].
Although it is sophisticated, earned value can be scaled to be appropriate for any
size of project. The key is in the project planning.
There are three primary advantages to using earned value:
1. Accuracy in reporting.
2. Ability to deal with the uneven rate of project expenditures and work.
3. The early warning it provides project managers, allowing them to take the necessary
corrective action should the project be spending more money than it is physically
accomplishing.
Earned Value Management (EVM) is a project management technique that
objectively tracks physical accomplishment of work and more [4]:
• Earn Value Management (EVM) technique used to track the Progress and Status of a
Project & Forecast the likely future performance of the Project.
• EVM technique integrates the scope, schedule and cost of a project.
• EVM technique answers a lot of questions to the stakeholders in a project related to the
performance of the project.
• EVM technique can be used to show past performance of the project, current
performance of the project and predict the future performance of the project by use of
statistical techniques.
• Good planning coupled with effective use of the EVM technique will reduce a large
amount of issues arising out of schedule and cost overruns.
There are following three basic elements of EVM:
• Planned Value (PV)
• Actual Cost (AC)
• Earned Value (EV).
All the three elements are captured on a regular basis as of a reporting date.
Planned Value (PV). This is also referred to as Budgeted Cost of Work Scheduled
(BCWS ). Planned Value (PV) or BCWS is the total cost of the work scheduled /Planned
as of a reporting date. This is calculated as in (1):
PV or BCWS = Hourly Rate * Total Hours Planned or Scheduled (1)
Actual Cost (AC). This is also referred to as Actual Cost of Work Performed
(ACWP). Actual Cost (AC) or ACWP is the total cost taken to complete the work as of a
reproting date. This is calculated as in (2):
AC or ACWP = Hourly Rate * Total Hours Spent (2)
Earned Value (EV). This is also referred to as Budgeted Cost of Work Performed
(BCWP). Earned Value (EV) or BCWP is the total cost of the work completed/performed
as of a reproting date. This is calculated as in (3):
EV or BCWP = Baselined Cost * % Complete Actual (3)
All these three elements can be derived from Work Breakdown Structure by
associating the costs to each of the tasks. For a big project it will be a tedious task to
calculate these elements manually. Scheduling Softwares like Microsoft Project is used to
calculate these three elements.
Cost Variance (CV) is very important factor to measure project performance.
Cost Variance (CV) indicates how much over or under budget the project is. Cost Variance
can be calculated as in (4):
Cost Variance (CV) = Earned Value (EV) - Actual Cost (AC) = BCWP – ACWP (4)
• The formula mentioned above gives the variance in terms of cost which will indicate
how less or more cost has been to complete the work as of date.
• Positive Cost Variance Indicates the project is under budget.
• Negative Cost Variance Indicates the project is over budget.
Cost Variance % indicates how much over or under budget the project is in terms
of percentage. Cost Variance % can be calculated as in (5):
CV % = Cost Variance (CV) / Earned Value (EV) = CV / BCWP (5)
• The formula mentioned above gives the variance in terms of percentage which will
indicate how much less or more money has been used to complete the work as planned
in terms of percentage.
• Positive Variance % indicates % under Budget.
• Negative Variance % indicates % over Budget.
Cost Performance Indicator (CPI). Cost Performance Indicator is an index
showing the efficiency of the utilization of the resources on the project. Cost Performance
Indicator can be calculated as in (6):
CPI = Earned Value (EV) /Actual Cost (AC) = BCWP / ACWP (6)
• The formula mentioned above gives the efficiency of the utilization of the resources
allocated to the project.
• CPI value above 1 indicates efficiency in utilizing the resources allocated to the project
is good.
• CPI value below 1 indicates efficiency in utilizing the resources allocated to the project
is not good.
To Complete Cost Performance Indicator (TCPI). To complete Cost
Performance Indicator is an index showing the efficiency at which the resources on the
project should be utilized for the remainder of the project. This can be calculated as in (7):
TCPI = ( Total Budget - EV ) / ( Total Budget - AC ) = ( Total Budget - BCWP ) /
( Total Budget - ACWP ) (7)
• The formula mentioned above gives the efficiency at which the project team should be
utilized for the remainder of the project.
• TCPI value above 1 indicates utilization of the project team for the remainder of the
project can be stringent.
• TCPI value below 1 indicates utilization of the project team for the remainder of the
project should be lenient.
Schedule Variance (SV) indicates how much ahead or behind schedule the project
is. Schedule Variance can be calculated as in (8):
Schedule Variance (SV) = Earned Value (EV) - Planned Value (PV) = BCWP –
BCWS (8)
• The formula mentioned above gives the variance in terms of cost which will indicate
how much cost of the work is yet to be completed as per schedule or how much cost of
work has been completed over and above the scheduled cost.
• Positive Schedule Variance Indicates we are ahead of schedule.
• Negative Schedule Variance Indicates we are behind of schedule.
Schedule Variance %. Schedule Variance % indicates how much ahead or behind
schedule the project is in terms of percentage. Schedule Variance % can be calculated as in
(9):
SV % = Schedule Variance (SV) / Planned Value (PV) = SV / BCWS (9)
• The formula mentioned above gives the variance in terms of percentage which will
indicate how much percentage of work is yet to be completed as per schedule or how
much percentage of work has been completed over and above the scheduled cost.
• Positive Variance % indicates % ahead of schedule.
• Negative Variance % indicates % behind of schedule.
Schedule Performance Indicator (SPI). Schedule Performance Indicator is an
index showing the efficiency of the time utilized on the project. Schedule Performance
Indicator can be calculated as in (10):
SPI = Earned Value (EV) /Planned Value (PV) = BCWP / BCWS (10)
• The formula mentioned above gives the efficiency of the project team in utilizing the
time allocated for the project.
• SPI value above 1 indicates project team is very efficient in utilizing the time allocated
to the project.
• SPI value below 1 indicates project team is less efficient in utilizing the time allocated
to the project.
To Complete Schedule Performance Indicator (TSPI). To Complete Schedule
Performance Indicator is an index showing the efficiency at which the remaining time on
the project should be utilized. This can be calculated as in (11):
TSPI = ( Total Budget - EV ) / ( Total Budget - PV ) = ( Total Budget - BCWP ) /
( Total Budget - BCWS ) (11)
• The formula mentioned above gives the efficiency at which the project team should
utilize the remaining time allocated for the project.
• TSPI value above 1 indicates project team can be lenient in utilizing the remaining time
allocated to the project.
• TSPI value below 1 indicates project team needs to work harder in utilizing the
remaining time allocated to the project.
Budget At Completion (BAC). Budget At Completion (BAC) is the total budget
allocated to the project.
• Budget At Completion (BAC) is generally plotted over time. Say like periods of
reporting (Monthly, Weekly etc).
• BAC is used to compute the Estimate At Completion (EAC), explained in next section.
• BAC is also used to compute the TCPI and TSPI.
BAC is calculated as in (12):
BAC = Baselined Effort-hours * Hourly Rate (12)
Estimate To Complete (ETC):
• Estimate To Complete (ETC) is the estimated cost required to complete the remainder
of the project.
• Estimate To Complete (ETC) is calculated and applied when the past estimating
assumptions become invalid and a need for fresh estimates arises.
• ETC is used to compute the Estimation at Completion (EAC).
Estimate At Completion (EAC):
• Estimate At Completion (EAC) is the estimated cost of the project at the end of the
project.
• There are three methods to calculate EAC [1]:
o Variances are Typical - This method is used when the variances at the current
stage are typical and are not expected to occure in the future.
o Past Estimating Assumptions are not valid - This method is used when the past
estimating assumptions are not valid and fresh estimates are applied to the
project.
o Variances will be present in the future - This method is used when the
assumption is that the current variances will be continue to be present in the
future.
• The formula for calculation of the three methods are as given below:
o AC + ( BAC -EV )
o AC + ETC ( Estimate to complete )
o AC + ( BAC- EV ) / CPI.
Variance At Completion (VAC) is the variance on the total budget at the end of
the project. This is the difference between what the project was originally expected
(baselined) to cost, versus what the it is now expected to cost. VAC is calculated as in (13):
VAC = BAC – EAC (13)
% Completed Planned. The percentage of work which was planned to be
completed by the Reporting Date. This is calculated as in 14:
% Completed Planned = PV / BAC (14)
% Completed Actual. The percentage of work which was actually completed by
the Reporting Date. This is calculated as in (15):
% Completed Actual = AC / EAC (15)
4. ANALYSES. CASE STUDY – USING MICROSOFT PROJECT FOR EARNED VALUE MANAGEMENT
Microsoft Project is a great tool to track project performance using Earned Value.
The following steps are required to get the EV values of the project plan [8]:
Step 1: Create project plan
We have a project plan called “Baselineproject”. This project contains just two
tasks called “User Interface” and “Database design”. We create the project plan with
following scenario or similar (Fig. 2).
• Estimated total duration to complete project: 10 days
• Sam and Tom are the resources working on this project (Fig. 3)
• Sam’s hourly rate is $12 per hour; Tom’s hourly rate is $8
• Estimated work: 160 hours (80 hours for User Interface task; 80 hours for Database
design task)
• Sam will be working on User Interface task; Tom will be working on Database design
task
• Sam and Tom will work max. 8 hours per day
• Both tasks will be start on 01/02/2010 and end on 12/02/2010.
REFERENCES
1. Budd, C.I., A Practical Guide to Earned Value Project Management, Management
Budd, C.S. Concepts, Vienna, 2005
2. Chatfield, C.S., Microsoft Office Project 2003, Microsoft Press, Washington, 2004
Johnson, T.D.
3. Counts, S., "Implementing EVM Data Analysis Adding Value from a NASA
Kerby, J. Project Manager's Perspective", The Project Management
Institute/International Project Management Symposium, Canberra,
Australia, March 1-3, 2006.
4. Dayal, S. Earned Value Management Using Microsoft Office Project, A Guide
for Managing Any Size Project Effectively, J Ross Pub, 2008
5. McCollum, J.K. Management de proiect - o abordare practica, Editura
Universitara, 2005
6. Project Practice Standard for Earned Value Management, Newtown Square,
Management Project Management Institute, Inc., 2005.
Institute
7. Solomon, P.J., Performance-based Earned Value, Hoboken, J. Wiley and Sons, 2007
Ralph, Y.R.
8. Stover, T.S. Microsoft Office Project 2007 Inside Out, Microsoft Press, Washington,
2007